Cotton prices to remain subdued - Capital Economics
Commodities Overview

Cotton prices to remain subdued

Commodities Update
Written by Capital Economics Economist

Prolonged weakness in demand and high production will keep the cotton market in a surplus in 2020/21. As a result, we forecast that cotton prices will remain low over the next 18 months.

  • Prolonged weakness in demand and high production will keep the cotton market in a surplus in 2020/21. As a result, we forecast that cotton prices will remain low over the next 18 months.
  • Since the beginning of this year, the price of cotton (ICE Cotton No. 2 Futures) has fallen by almost 10%. Prices plummeted to a trough of just 48 US cents in early April as lockdown measures led to a dramatic slump in demand. But they have since recovered to around 62 US cents, as oil prices have rebounded (cotton competes with petroleum-based synthetic fibres) and lockdown measures have been lifted. However, we do not think that the recovery in cotton prices has much further to run.
  • Global cotton consumption is likely to have fallen by around 15% to 103m bales in the 2019/20 season (Aug.-Jul.), in the wake of retail and factory closures. Looking ahead, consumption should partially recover as China’s economy bounces back strongly (China is the world’s largest consumer of cotton, accounting for around a third of total consumption). (See Chart 1.) But the threat of a second wave of virus infections in the developed world, the squeezing of incomes and quieter high streets should hold down clothing demand for some time. Therefore, we only expect consumption to grow by approximately 12% to 117m bales in the 2020/21 season, remaining below the 2018/19 level.
  • Meanwhile, global production will probably have risen by 3.5% in 2019/20, in part owing to significantly higher output in India. Looking ahead, we expect production to tick down slightly in the 2020/21 season, by 4%, as social distancing measures weigh on supply and damage is caused by desert locusts in Pakistan. Nonetheless, the risk to our supply forecast lies to the upside. A wetter than average monsoon in India, the world’s largest producer of cotton, has led to higher-than-expected summer planting as farmers hope to make up for losses during the pandemic.
  • Putting our supply and demand forecasts together, we estimate that the cotton market will remain in a surplus in 2020/21, albeit a smaller surplus than the USDA forecast, as demand revives. (See Chart 2.)
  • Admittedly, there is the risk of a renewed escalation in US-China trade tensions, which could lead to additional tariffs on US cotton. However, we suspect that any imposition of new tariffs would have little effect on global prices as China would turn, where possible, to alternative suppliers.
  • All told, we think that the surplus in the cotton market will keep a lid on prices over the coming year. We forecast that the price of cotton at end-2020 and end-2021 will be 65 US cents per lb and 70 US cents, respectively, little changed from 62 US cents currently.

Chart 1: Share of Global Consumption (2018/19)

Chart 2: Cotton Market Balance (Mn. Bales)

Sources: USDA, Capital Economics

Sources: USDA, Capital Economics


William Ellis, Research Assistant, william.ellis@capitaleconomics.com